Monetary Developments June 2009 Credit growth improves, though not to pre-crisis level… Resident deposits decline for the first time this yearIn its latest economic brief on monetary developments, National Bank of Kuwait (NBK) reports that credit growth accelerated in June, driven mainly by loans to personal facilities. However, this was not enough to increase money supply (M2), which witnessed a 0.1% contraction (m-o-m) in June. Money growth continues to be held back by falling non-resident deposits. Quarterly, M2 growth in 2Q09 registered its slowest expansion since 4Q05. This contrasts with the strong expansion in the first quarter boosted by government injections to replace the outflow of foreign funds from local banks.Meanwhile, private resident deposits bucked their recent trend and dropped for the first time this year, partly due to seasonal influences. Declines in non-resident deposits continued in June. The CBK cut its repo rate by 25 bps on July 21, aiming at supporting liquidity in the banking system.NBK noted that the discount rate was left unchanged. The earlier 50 bps cut in the discount rate, in mid-May, was followed by improved credit growth, loans. Loans grew for the second consecutive month, rising by 0.6% (+KD 138 million) m-o-m in June. Year-on-year (y-o-y) growth picked up from its May level, accelerating to 9.8%. Personal facilities for the purchase of securities maintained their growth in June at KD 46 million, whereas other personal facilities rose KD 65 million, their largest monthly increase since December 2007. (Personal loans are priced off of the discount rate). Loans to the real estate sector witnessed weaker growth in June, rising KD 22 million. Meanwhile, loans to the construction sector and non-bank financial institutions reversed their previous drops and rose KD 31 million each. Private resident deposits saw their first decline this year, falling KD 17 million in June. The drop was strictly in foreign currency while local currency deposits were up KD 51 million. This is partly due to seasonal factors. Large withdrawals and transfers typically occur every holiday season. However, it is worth noting that private resident deposits grew 14.8% during H109, with y-o-y growth rising to 22% in June. Meanwhile, private deposits from non-residents dropped by a further KD 243 million in June, falling 76% from August 2008 level. CBK’s net foreign assets (NFAs) dropped KD 474 million in June, following a decline by KD 79 million in the previous month. This acceleration could be linked to the holiday season outflows which add to the ongoing outflow of non-resident deposits. Meanwhile, local banks’ NFAs rose by a further KD 245 million, due to a continued drop in foreign liabilities which surpassed the drop in banks’ foreign assets. The CBK issued KD 102 million in new bonds in June. However, liquidity seemed tighter as total banks’ liquid assets (incl. local net inter-bank deposits) dropped KD 110 million in June. Accordingly, time deposits with CBK fell KD 295 million, while banks' holdings of public dept instruments fell KD 91 million following the maturity of a KD 100 million T-Bonds. Still, despite lower liquidity, average KIBOR saw a continued but limited decline in June, ranging between 4 and 8 bps over the different maturities. Consequently, the spread between KIBOR and LIBOR remained unchanged in June through end July.